What Are Decentralized Stablecoins And How Do They Operate?

• 1 With the coming of decentralized stablecoins, we are taking a look at what stablecoins are. 
• 2 Digital currency including crypto and stablecoins are getting increasingly popular. But what are Decentralized Stablecoins and how do they operate?

What are Decentralized Stablecoins

Stablecoins are a unique type of cryptocurrency proposed to possess a relatively stable value over time, unlike Bitcoin and most other altcoins. This stability is accomplished by tethering the coin’s value to that of a stable asset like the US dollar. Stablecoins provide all the interest in crypto while trying to keep away uncontrolled volatility.

Decentralized stablecoins are stablecoins that are built on decentralized blockchain networks. USDT and USDC are examples of centralized stablecoins, that is, a body or an organization is responsible for the maintenance of that stablecoin. On the other hand, decentralized stablecoins are not governed by any authority.

Crypto is volatile, and the total market value of crypto can increase and fall by almost 100 Million dollars in 24 hours. This volatility affects even the top cryptocurrency, Bitcoin (BTC). Investors have been witnessing 5% daily changes in Bitcoin’s value over the past month.

However, while theoretically stablecoins are supposed to be ‘stable,’ that is not necessary. In the recent past, investors have lost money in stablecoins. The TerraUSD incident of May, 2022 is case in point.

Types of Stablecoin

There are different types of stablecoins; here’s a brief description of each type.

1. Fiat-collateralized stablecoins 

Fiat-collateralized is a type of stablecoin that keeps a reserve of fiat money. For instance, a stablecoin might decide to use the US dollar as a reserve currency in order for its value to remain stable. ‍

2. Commodity-backed stablecoins

This stablecoin uses back-up commodities like crude oil or special metals like silver and gold to make the coin stable. ‍

3. Crypto-collateralized stablecoins

Crypto-collateralized stablecoins are backed by certain cryptocurrencies like Bitcoin and Ethereum.

4. Algorithmic stablecoins

Algorithmic stablecoins make use of algorithms and economic design to achieve stability. Alogarithmic stablecoins are not proven, yet.

Why Stablecoins Are Popular

Traditional cryptocurrencies, which are still volatile, the value of stablecoin generally remains corresponding to the asset on which it is fixed. This encourages stablecoin keepers to store value. ‍

Users need not pay excessive transfer fees to send money across the border. With stablecoins, things are made simpler since transacting with low fees can cost less than a few cents if you operate on low-fee chains. In addition, stablecoins don’t require intermediaries for you to send money worldwide.

Stablecoins can be used not only to trade assets, but also to store value and execute cross-border transactions at relatively low costs. These are readily available on a large number of exchanges.

Steve Anderrson

Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.